DR.

RAM MANOHAR LOHIYA,

NATIONAL LAW UNIVERSITY,
LUCKNOW
SESSION-2019

SUBJECT: BANKING AND INSURANCE LAW

TOPIC: MOTOR INSURANCE IN INDIA

CLASS: B.A.LL.B. (HONS), VIth SEMESTER

SUBMITTED TO SUBMITTED BY
DR. APARNA SINGH RAJ KIRAN
ASSISTANT PROFESSOR ENROLLMENT NO.160101117
SECTION: A

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 ACKNOWLEDGMENT

First of all, I would like to thank my teacher of the subject “Banking and Insurance Law”, Dr.

Aparna Singh, for providing every bit of help and also showing the way in which to proceed

and how to go about the project. I would also like to thank my parents, friends and others

who helped me immensely at every step and gave every possible bit of help that I needed in

preparing the project and making it look presentable in a good way. I would also like to thank

the library staff of RMLNLU who provided me with books that I needed in making and

preparing the project and other pieces of information and help that was required. At last I

would like to sincerely thank God who gave me the much needed strength and power to go

ahead with the project and make it in a presentable way.

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 TABLE OF CONTENTS
INTRODUCTION......................................................................................................................4
MOTOR INSURANCE.............................................................................................................5
 What motor insurance is:.............................................................................................5
 Types of Motor Insurance cover:.................................................................................5
 What Motor Insurance covers:....................................................................................5
 What Motor Insurance excludes:................................................................................6
 Basis of Sum Insured:...................................................................................................6
WHY ONE SHOULD GO FOR MOTOR INSURANCE?.......................................................6
PRINCIPLES OF INSURANCE & ITS RELEVANCE WITH MOTOR INSURANCE.........7
1) Utmost Good Faith.............................................................................................................7
2) Insurable Interest................................................................................................................8
3) Principal of Indemnity.......................................................................................................9
4) Proximate cause...............................................................................................................10
THE MOTOR VEHICLES ACT, 1988...................................................................................11
No Fault Liability:................................................................................................................11
Motor Vehicles Act, 1988 provides as follows:...................................................................11
Hit and Run Accidents:........................................................................................................12
Solatium fund:......................................................................................................................13
NECESSITY FOR THIRD PARTY INSURANCE AND ITS EXEMPTIONS.....................13
CONCLUSION........................................................................................................................15
BIBILOGRAPHY....................................................................................................................16

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 INTRODUCTION
Insurance is an economic activity that helps to reduce the risk of loss. It is a contract of
indemnity where the indemnifier (called insurer/assurer), agrees for consideration (called
premium) to indemnify the loss caused to the indemnified (called insured/ assured). It is in
writing and the insurance deed is called policy. The period for which policy is taken is called
“term of policy.1”

What is motor insurance? The answer to this question is very simple as it comprises two
words i.e. motor + insurance and motor means a vehicle of any sort which is running on the
road and Insurance means to provide cover for any unforeseen risk which may occur in day to
day life. Then another question arises what is unforeseen risk? You are walking on the road a
car hits you from the back, you get a fracture in your leg and while coming out you never
thought that you will have an accident but it happened and this is unforeseen risk i.e. a risk of
happening of an event which may happen or may not happen. So Motor Insurance as we all
know is the insurance for motor vehicles, there are various risks which are related with the
loss of/ or damage to motor vehicles like theft, fire or any accidental damage so as to provide
coverage for this motor insurance is taken.
Motor insurance in India is a mandatory requirement for all vehicle owners. Whether you use
it for individual use or commercial purpose, you need to have an auto insurance policy in
place. Vehicle insurance policies in India have been devised to insure private cars, two
wheelers, and commercial vehicle.

MOTOR INSURANCE
 What motor insurance is:

Motor insurance gives protection to the vehicle owner against

(i). Damages to his/her vehicle and
(ii). Pays for any Third Party Liability determined as per law against the owner of the vehicle.

Third Party Insurance is a statutory requirement. The owner of the vehicle is legally liable for
any injury or damage to third party life or property caused by or arising out of the use of the

1
By C.L. Tyagi & Madhu Tyagi, Insurance Law and Practice, pg.no 02

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vehicle in a public place. Driving a motor vehicle without insurance in a public place is a
punishable offence in terms of the Motor Vehicles Act, 1988.
 Types of Motor Insurance cover:

Broadly there are two types of insurances policies that offer motor insurance cover:
a. Liability Only Policy (Statutory requirement)
b. Package Policy (Liability Only Policy + Damage to owner’s Vehicle usually called
O.D Cover).
Remember that if you take only a Liability Only Policy, damage to your vehicle will not
be covered. Hence, it would be prudent to take a Package Policy which would give a
wider cover, including cover for your vehicle.
 What Motor Insurance covers:

The damages to the vehicle due to the following perils are usually covered under OD section
of the Motor Insurance policy:
a. Fire, Explosion, Self- Ignition, Lightning
b. Burglary/Housebreaking / Theft
c. Riot & Strike
d. Earthquake
e. Flood, Storm, Cyclone, Hurricane, tempest, inundation, hailstorm, frost
f. Accidental external means
g. Malicious Act
h. Terrorism acts
i. While in Transit by Rail/ Road, Inland waterways, Lift, Elevator or Air
j. Land slide / Rock slide

 What Motor Insurance excludes:

The following contingencies are usually excluded under the Motor Insurance Policy:
a. Not having a valid Driving License
b. Under Influence of intoxicating liquor/ drugs
c. Accident taking place beyond Geographical limits
d. While Vehicle is used for unlawful purposes
e. Electrical/Mechanical Breakdowns.

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  Basis of Sum Insured:

For Own Damage: The Sum Insured under a Motor Insurance policy reflects the value of the
motor vehicle determined based on the concept known as Insured’s Declared Value.
Insured’s Declared Value is the value arrived at based on the Manufacturer’s present value
and depreciation based on the Age of the Vehicle.
For Third Party: Coverage is as per requirements of the Motor Vehicles Act, 1988.
Compulsory Personal accident covers for owner -driver is also included. Policy can also be
extended to cover various other risks like Personal Accident to occupants of vehicle, Work
Men’s Compensation to Driver, etc over and above the cover available to him under statute.

WHY ONE SHOULD GO FOR MOTOR INSURANCE?

As you all know in our country crores of vehicles are plying on the road and lot of accidents
occurred daily, and due to these accidents damages to material and third party occurs. Third
party is any person other than the owner. But the question arises how the loss is to be
compensated? After realizing all these problems it was made mandatory for all the vehicles
which are plying on the road to have an insurance which can provide coverage to general
public against the risk of loss or damage to motor vehicles and with this the motor insurance
concept has come into existence and Act made this insurance compulsory for everyone those
who are driving the vehicle on the road so it become quite popular among people and than
motor insurance policies become available to provide a comprehensive cover and a third
party liability cover.

PRINCIPLES OF INSURANCE & ITS RELEVANCE WITH MOTOR

INSURANCE

 Utmost Good Faith

 Insurable Interest

 Principal of Indemnity

 Proximate cause

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1) Utmost Good Faith: Contract of insurance have all essential elements of nature of
general contract. According to section 2(h) and section (10) of Indian Contract Act, the valid
contract must have the essential element of offer and acceptance, considerations, legal
parties, sound mind and free consent of the parties. Like every other contract the insurance
Contract is the sort of contract it is approved by the Indian Contract Act.
Contract of insurance comes in to an existence where there is an offer and the underwriter or
proposal of one side and the insurer accepts it by issuing the policy. It has to satisfy all the
essential elements of a simple contract. The contract of insurance must be entering into
contract by the competent person in order to be a valid contract. The competent person may
be who is the age of majority according to law and who is of sound mind. Premium is the age
consideration that must be given for starting the insurance contract. The object of the contract
should be lawful. Every person entering into an insurance contract should enter into by their
free consent.

Contracts of motor insurance are governed by the doctrine of utmost good faith. It is one of
the important principles of that implies to the contract of insurance It refers that both the
parties involved in insurance contract should make the disclosure of all material facts and
figures relating to the subject matter of the insurance contract. If either party does not
disclose the utmost good faith the other party may avoid the contract. The insured’s duty to
disclose all material facts known to him but unknown to the insurer. Similarly the insured’s
duty of utmost good faith is disclosing the scope of insurance at the time of contract. Any
concealment, misrepresentation, fraud or mistake concerning the material facts to the risk
should be disclosed. No important material facts and figures must be concealed. Thus,
responsibility of disclosure of both parties should be a reciprocal duty i.e. disclosure is
absolute and positive. Some of the few examples of disclosure of material facts such as:
Life insurance: Age, income, education, occupation, health, family size, etc.
Fire insurance: Inflammable materials, nature and its uses, fire detection etc. Motor
Insurance: Type of car, value and details of driver, the driving history and traffic convictions
of the driver, past loss experience, etc i.e. which vehicle he is using, in which area he will be
driving the vehicle i.e. hilly area or plain area, how good is the driver at driving the vehicle
which can be known by his past record. Any past experience related to loss has to be
informed to the insurer.

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In the context of the principle of utmost good faith, it is pertinent to note the provisions of
Section 149 of the Motor Vehicles Act 1988. This section provides that: it is compulsory to
take the insurance policy if a vehicle is plying on the road and if a certificate of insurance is
being issued then insurer can not cancel or avoid a third party liability under this policy In
other words It means that any one who is driving a vehicle on the road can not drive the
vehicle without an insurance policy it may be a comprehensive policy or only a third party
liability policy.

2) Insurable Interest: Insurable Interest means the insured must have some legal right to
insure the subject matter. Insurable interest is an important and fundamental principle of
insurance. Thus it is necessary for valid contract of insurance. According to the definition of
insurable interest in the event of the legal right to insure arising out of a financial relationship
should be recognized under the law between the insured and the subject matter of insurance.
It means that insurable interest must be a pecuniary interest. The insured must have an
insurable interest in the subject matter of insurance.

Without insurable interest the contract of insurance is void and unenforceable. A person said
to have an insurable interest in the subject matter has to have benefit from its existence and
prejudice by its destruction. Thus, insurable interest must be actual and real and not arising
out of mere expectation. For e.g. if I own a car I can take a insurance policy on my name but
if my friend own a car then can I take a policy on my name? The answer is ‘No’ as we don’t
have any right on other’s property and no profit or loss will occur to me if a claim arises to
this vehicle.

The essentials of insurable interest are:-

i) The existence of property exposed to loss, damage or a potential liability;

ii) Such property or liability must be the subject matter of insurance;

iii) The insured must bear a legal relationship to the subject matter whereby he stands to
benefit by the safety of the property, right, interest or freedom from liability and stands to
lose by and loss, damage, injury or creation of liability.

In motor insurance, the vehicle is the property, which is exposed to loss or damage. The
insured also has a legal liability towards third parties; he may suffer financial loss if he
insures that liability through third party caused y negligent use of the vehicle. Therefore, the
insured has insurable interest, which entitles him to insure the vehicle against damage and

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liability risk. Further, under Section 146 of the M.V.Act 1988, no person shall allow any
other person to use a vehicle in a public place unless the vehicle is covered by an insurance
policy complying with the requirements of the Act. If a vehicle is purchased under a hire
purchase agreement, the finance company has an insurable interest in the vehicle until all the
installments are repaid. A clause included in the policy to protect the financier’s interest. This
clause provides that in respect of loss or damage to the motor vehicle (which loss or damage
is not made good by repair or replacement) the monies shall be payable to the owners, i.e. the
financiers.

3) Principal of Indemnity: Indemnity means to indemnify the loss or to put the insured back
in same position as he was before the loss. The word “indemnity” implies that protection,
security against damage or loss of security against legal responsibility. According to this
principle the assured in the case of loss against the policy made shall be fully indemnified.
Indemnity is one of the fundamental principles that except life insurance, personal accident
insurance, other contracts of insurance such as fire, marine and accident insurance are
contracts of indemnity. There are two corollaries to indemnity; they are 1) Subrogation and 2)
Contribution.

The term ‘Subrogation’ means transfer of all the rights and remedies available to the insured
in respect of subject matter to the insured after indemnity has been affected. It is also referred
as getting into the shoes of the others. It implies that the substitution of the insurer in place of
the insured in respect of the latter’s of Subrogation. For e.g. If a vehicle has collided with
another vehicle then the loss occurred to vehicle can be claimed from insurer but if it is due to
other party and loss has occurred then it will come from other party, which means insurer
may give the claim to you but they can get the amount of loss from the other party.
This principle holds good only in the case of motor, fire & marine insurance.
Contribution in simple words means to contribute the amount. This is the one important
principle essential for valid insurance contract. This doctrine of contribution also applies only
to contracts of indemnity i.e., to fire and marine insurance. According to this principle, the
case of double insurance, the insurers are to share the loss in proportion to the amount
assured by each of them. In order to apply the right to contribution between two or more
companies the following factors must exist:
(a) The subject matter of insurance must be the same.
(b) The event insured must be the same.
(c) The insured must be the same.
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 For e.g. If a car is insured by two insurers for Rs. 100,000 from insurer A and for Rs.
200,000 from insurer B. A loss occurs for 75,000 then the claim will come in proportion from
both the insurer’s i.e. Rs 25,000 from insurer A and Rs. 50,000 from insurer B. It does not
mean that if loss occurs and if a person has double insurance then he can claim the whole
amount from both the insurers, this way he can make profit out of these contracts. So for this
purpose this contribution corollary has come into existence as insurance contracts are the
contracts of indemnity and no body has to make profit out of it.

4) Proximate cause: it means the actual cause of the loss due to which a loss has occurred.
Causa Proxima is necessary for a valid contract of insurance. It has been defined as “The
active efficient cause of that sets in motion a train of events which brings about a result,
without the intervention of any force started and working actively from a new and
independent source”.
The doctrine of proximate cause applies to motor insurance as to other classes of insurance.
The loss or damage to the vehicle is indemnified only if it is proximately caused by on of the
insured perils. An insured peril means the perils covered by insurer under the policy. The
doctrine also applies to third party claims. The third party injury or damage must be
proximately caused by the negligence of the insured for which he is held legally liable to pay
damages.

THE MOTOR VEHICLES ACT, 1988

The Motor Vehicles Act, 1988 (Act No. 59 of 1988) is the outcome of the recommendations
proposed by various Committees. It has replaced the earlier 1939 Act and it became effective
from 1st July 1989. Some of the more important provisions of the Act provide for the
following matters:
a) Rationalization of certain definitions with additions of certain new definitions of new types
of vehicles.
b) Stricter procedures for grant of driving license and period of their validity.
c) Laying down of standards for the components and parts of motor vehicles.
d) Standards for anti-pollution control devices.
e) Provisions for issuing fitness certificates of vehicles also by the authorized testing stations.
f) Enabling provision for updating the system of registration marks.

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g) Liberalized schemes for grant of All-India Tourist permits as also national permits for
goods carriages.
h) Administration of Solarium Fund by General Insurance Corporation.
i) Maintenance of State registers for driving licenses and vehicle registration.
j) Constitution of Road Safety Councils.
k) Seeking to provide for more deterrent punishment in cases of certain offences.

No Fault Liability:
Motor Vehicles Act, 19882 provides as follows:

"Where the death or permanent disablement of any person has resulted from an accident
arising out of the use of a motor vehicle, the owner of the vehicle shall, or, as the case may
be, the owners of the vehicle shall, jointly and severally, be liable to pay compensation n the
respect of such death or disablement in accordance with the provisions of this section.
The material change in the law is that the negligence of the owner of the owner or service of
the motor vehicle is no longer relevant to decide the question of liability. The provisions of
the Act 3specifically provides when the claimants shall not be requires to plead and establish
that the death or permanent disablement in respect of which the claim has been made due to
any wrongful act, neglect or default of the owner, owners, of the vehicle, or vehicles
concerned or any other person. This concept is known as No Fault Liability.
However the amount of compensation payable is restricted to Rs.50, 000/- in the case of
death and Rs.25, 000/-in the case of permanent disablement to motor vehicle act 1988.
Earlier, it was Rs. 25,000/- for death and Rs. 12,000/-for permanent disablement.
Permanent disablement is defined as any injury or injuries involving;
a) Permanent privation of the sight of either eye or the hearing either ear, or privation of any
member or joint; or
(b) Destruction or permanent impairing of the powers of any member on joint
(c) Permanent disfiguration of the head or face.

2
Section 140(1)
3
section 140 (3)

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Hit and Run Accidents:

Hit and run accident is "an accident arising out of the use of a motor vehicle or motor
vehicles the identity whereof cannot be ascertained in spite of reasonable efforts for the
purpose."
The Act provides4 that the central government may establish in fund known as Solatium
Fund to be utilized for paying compensation in respect of death or grievous hurt to persons
resulting from Hit and Run Motor accidents.
It is provided that grievous hurt shall have the same meaning as in the Indian Penal Code.
According to the Indian Penal Code5 the following kinds of hurts are designed as grievous:
 Permanent Privation of the vision of either eye.
 Permanent Privation of the hearing of either ear.
 Privation of any member or joint.
 Permanent disfiguration of the head or face.
 Fracture or dislocation of a bone or tooth.

Any hurt which endangers life or which causes the sufferer to be during the space of twenty
days in severe bodily pain or unable to follow hi ordinary pursuits.
The compensation payable form death claims is fixed at Rs. 25,000/- an in respect of
'grievous hurt' Rs.12, 500/-after the amendment to Motor Vehicles Act 1988. (Earlier to
amendment, it was Rs.8500/- for death and Rs. 2,000/-for grievous hurt.
The payment of compensation for Hit and Run Accidents is subject to the condition that if
any compensation is awarded for such death or grievous hurt under any other provisions of
the Motor Vehicles Act or any other law under Hit and Run Accident has to be deduced from
such compensation.

Solatium fund:

It is the fund, which is, consists of contributions from the General Insurance Industry, the
Central government, and the State Government a; decided by the Central government. A
solatium fund is created so as to provide compensation for the victims of hit & run cases. You
must have seen a lot of accidents on road where a vehicle had hit the other vehicle and
peddlers on the road, so for them this solatium fund is created to provide them compensation.
4
Section 163
5
section 320

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 NECESSITY FOR THIRD PARTY INSURANCE AND ITS
EXEMPTIONS

A third party insurance policy is a policy under which the insurance company agrees to
indemnify the insured person, if he is sued or held legally liable for injuries or damage done
to a third party. The insured is one party, the insurance company is the second party, and the
person you (the insured) injure who claims damages against you is the third party.6
No person shall use, except as a passenger, or cause or allow any other person to use, a motor
vehicle in a public place, unless there is in force in relation to the use of the vehicle by that
person or that other person, as the case may be, a policy of insurance complying with the
requirements of this Chapter (chapter XI).[Provided that in case of a vehicle carrying, or
meant to carry, dangerous or hazardous goods, there shall also be a policy of insurance under
the public liability insurance act, 1991.]
Section 146 seeks to protect members of public traveling in vehicles or using the roads
(public place) from the financial liability caused by risks attendant upon the use of motor
vehicles on the roads by making third party insurance compulsory for users of motor vehicle.
This section embodies the compulsory nature of third party insurance for using a vehicle in a
public place.
Salient Features of Third Party Insurance
1) Third party insurance is compulsory for all motor vehicles. In G. Govindan v.
New India Assurance Co. Ltd.7, Third party risks insurance is mandatory under
the statute .This provision cannot be overridden by any clause in the insurance
policy.

2) Third party insurance does not cover injuries to the insured himself but to the rest
of the world who is injured by the insured.

3) Beneficiary of third party insurance is the injured third party, the insured or the
policy holder is only nominally the beneficiary of the policy. In practice the
money is always paid direct by the insurance company to the third party (or his

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A third party insurance policy is a policy under which the insurance company agrees to indemnify the insured
person, if he is sued or held legally liable for injuries or damage done to a third party. The insured is one party,
the insurance company is the second party, and the person you (the insured) injure who claims damages against
you is the third party
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AIR 1999 SC 1398

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 solicitor) and does not even pass through the hands of the insured person.

4) In third party policies the premiums do not vary with the value of what is being
insured because what is insured is the ‘legal liability’ and it is not possible to
know in advance what that liability will be.

5) Third party insurance is almost entirely fault-based.(means you have to prove the
fault of the insured first and also that injury occurred from the fault of the insured
to claim damages from him)

6) Third party insurance involves lawyers aid

7) The third party insurance is unpopular with insurance companies as compared to

first party insurance, because they never know the maximum amounts they will
have to pay under third party policies.

EXEMPTIONS
The provisions relating to compulsory third party insurance do not apply to any vehicle
owned by the Central government or state government and used for Government purposes
unconnected with any commercial enterprise. However the government has been given power
to grant exemption for any vehicle owned by
a) The Central government or a state government if the vehicle is used for Government
purposes connected with any commercial enterprise;
b) Any local authority;
c) Any state transport undertaking
However, the above exemption is made only if a fund is established and maintained by that
authority for meeting any liability arising out of the use of any vehicle. The fund has to be
established in accordance with the Rules framed under the Act.

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 CONCLUSION

Third party insurance concept under motor vehicle act protects the interest of a third party
who becomes the victim of accident or injury caused by the fault of the insured. So any
liability arising on the insured by the third party is mitigated by the insurance company. Third
party insurance is compulsory under the motor vehicles Act, 1988. As the third party
insurance is mandatory so it cannot be overridden be any clause in the insurance policy.

It is the duty of insurers to satisfy the judgments and awards against persons insured in
respect of third party risks. The insurance company is a ‘State’ within the meaning of article
12 of the Constitution. For this reason it cannot deny, discriminate or refuse third party
insurance cover to State run vehicles because their actions are guided by Article 14 of the
Constitution.8

The compulsory nature of third party insurance is justifiable as it makes the process easier for
the injured person to recover money from the insured. The defendant or wrongdoer cannot be
exempted on the ground that he has become insolvent. If he owns a vehicle he bound to pay
to the injured directly or through his insurance company.

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Avatar Singh, Law of Insurance

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 BIBILOGRAPHY

BOOKS REFFERED:
 Law of Motor Insurance by Merkin, Robert and Hird, Norma and Stuart-Smith,

Jeremy

 Motor Vehicles Laws: A Comprehensive Examination of Motor Vehicles Law with

Special Focus on Law Relating to Insurance by Kannan

 Motor Insurance Theory & Practice 2nd Ed. Authur by Cannar, K.

 B.M.Gandhi,‘Law of Torts- with Law of Statutory Compensation', Eastern Book

Company, 2nd edi,311-330

 Avtar Singh, ‘Law of Insurance' Eastern Book Company, first edition,134-139

WEBSITES REFFERED

 http://www.ey.com/Publication/vwLUAssets/Motor_Insurance/$FILE/Motor-

Insurance.pdf

 http://www.njinsure.in/njinsure/downloads/brochures/icici_lombard/i_lombard_motor

_insurance.pdf

 http://www.njinsure.in/njinsure/downloads/brochures/icici_lombard/i_lombard_motor

_insurance.pdf

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